With both inflation and interest rates rising, isn’t it an oxymoron to go for bonds, since they are not very suitable in such times which I had stated so myself here? The answer is simple: we still need bonds in a diversified investment portfolio. Also, we had seen some instances of investors moving towards bonds during the ongoing market sellout despite threats from the two “in-“ words, like the United States Treasury yields falling due to demand for bonds1, thus proving their use as a safe haven.
With our Frasers Property Treasury 3.65% bonds maturing in a couple of days, we are looking for replacements to reinvest the redeemed funds. Besides the current bond ETFs that we are holding, I chanced upon the two Astrea 7 bonds and the Singapore Savings Bond (June 2022 issue).
Let us take a brief look at the three.
Astrea 7 Bonds
There are write-ups on the details of the Astrea 7 bonds (like here and here), so I shall not delve much into it. Basically, it is a corporate bond issued by Astrea 7 Pte Ltd, which ultimately is indirectly wholly owned by Temasek Holdings. The performance of the bonds is supported by cash flows from a portfolio of private equity (PE) funds, which are generated mainly through the monetization of or exit from investments by the PE funds. For retail investors there are the Class A-1 bonds denominated in Singapore dollars (SGD) with a minimum 5-year duration at 4.125% annual coupon rate, and the Class B bonds denominated in United States dollars (USD) with a minimum 6-year duration at 6% annual coupon rate.
Singapore Savings Bond
SSB for short, it is a bond backed by the Singapore government, and for the June 2022 issue, the average return rate is 2.53% annually if held over the full tenure of 10 years. The rates of the SSB are determined by a formula that takes reference from the yields of one, two, five and ten-year Singapore Government Securities (SGS).
Besides the facts that both coupon rates and the nature of the bonds differ, we would still need to compare from an investor’s point of view in terms of other conditions. I had made a table for easy viewing and decision making:
Astrea 7 Class A-1
Astrea Class B
SSB (June 2022)
Minimum application amount (Principal)
10 years with mandatory call after 5 years
10 years with mandatory call after 6 years
Annual coupon rate
4.125% + 1% one-time step up after 5 years (if not redeemed)
6% + 1% one-time step up after 6 years (if not redeemed)
Averaged 2.53% if held for full 10 years
Credit rating (Fitch)
Expected A + sf
Expected BBB + sf
AAA (rating for Singapore government)
Private equity funds
Lower than Class A-1
Fig. 1: Comparison of the bonds.
While all investments carry risks in many forms (which includes a total default), we need to manage in terms of the probability of them happening. I will highlight a couple of risks here that, in my opinion, have a higher probability of happening.
Interest rate risk – This risk is real with all the talk about interest rates rising. If the prevailing interest rate is higher than the bond’s coupon rate, then the bond’s value would go below par due to its sell-off by investors going after newer bonds with a higher coupon rate and/or bank deposits with higher interest rates. This is not applicable for SSB as the bond value can be redeemed at par value.
Forex risk – Astrea 7 Class B bonds are denominated in USD, which is subjected to foreign exchange risk. Though USD-SGD fluctuates between 1.2x and 1.4x for the past decade, we may not know its direction in the future. With a coupon rate of 6%, you may earn less or more if SGD strengthened or weakened against USD, respectively. On a related note, this also concerns the SGD value of your bond principal should you initially invest at a higher/lower USD-SGD and redeemed at a lower/higher USD-SGD, which could be viewed as an additional loss/gain.
To have a glimpse on how the Astrea 7 bonds might fair, we could see from the past iterations that were listed the last few years: Astrea IV, Astrea V and Astrea VI (incidentally these three used Roman numerals). As of 20 May 2022, both Astrea IV and Astrea V were trading above par (SGD 1.04 and SGD 1.022 respectively) while Astrea VI was below par at SGD 0.99. Coupon rate wise among the four bonds, Astrea IV is the highest at 4.35% and Astrea VI is at 3%, which probably explain why the latter was trading below par. Based on Astrea 7’s higher rates at 4.125% for SGD or at 6% for USD, it might be trading at a premium (i.e., above par) upon listing, ceteris paribus.
Being a bond based on PE, the Astrea bonds are holding well so far. However, with an expected recession looming and the recent battering of growth stocks, this may pose a concern as usually PE are associated with growth, though I foresee this as a short-term kink.
Assuming all the compared bonds run the full tenure of 10 years, comparing June 2022 SSB’s averaged 2.53% per year, the risk premium is 1.595% (year 1 to year 5) / 2.595% (year 6 to maturity) for the SGD Class A-1 and 3.47% (year 1 to year 6) / 4.47% (year 7 to year 10) for the USD Class B. Class B’s rate is naturally higher to compensate for the risk taken since it is lower in debt seniority and exposed to forex risk.
The Bedokian’s Take
The Bedokian Portfolio’s bond selection entails the bond to be at least of investment grade and five years to maturity2, to which all the bonds mentioned here had passed. Having reviewed and weighed the factors mentioned here and in other blog posts, we would be allocating between the June 2022 SSB and the Astrea 7 Class A-1.
The closing date for the application for the SSB and the Astrea 7 bonds are 26 May 2022 and 25 May 2022, respectively.
Astrea 7 Bond Prospectus – https://www.azalea.com.sg/storage/app/media/reports/Prospectus/astrea-7-pte-ltd-prospectus-19-may-2022.pdf
1 – Min, Sarah & McKeever, Vicky. Treasury yields fall, prices climb as investors seek shelter from stock sell-off. CNBC. 19 May 2022. https://www.cnbc.com/2022/05/19/us-bonds-treasury-prices-climb-following-stock-market-sell-off.html (accessed 20 May 2022).
2 – The Bedokian Portfolio (2nd Edition). p108.
Hi, based on previous allocations of Astrea (excluding the 'lousy' Astrea VI with only 3%), its hard to get a decent allocation if you only bid a small amount. If you bid for $50k or more, you are subject to balloting. So it would be better to use all your cash to bid as much as you can for Astrea and apply for SSB the following month with the remaining money.ReplyDelete
Thanks for the information. I had checked the IV and V balloting results and actually it does favour small applications (typically <= 3,000), though I understood what you meant as it is not a decent enough size as an investment. I might allocate additional capital for application for both this round to balance the bond part in our portfolio (which had gone lower in recent months).
I got 12k A-1 as I applied for the max amount without balloting (i.e. 49k). Did you get 12k or did you go for balloting for higher amount? I am interested in whether there is a right time to buy class B - if US:SGD drops below 1.35, that might reduce the downside FX risk vs upside. Noted that Class B holders will already have lost money in SGD terms due to USD rate being lower than the IPO rate.Delete
I applied much lesser than yours lol, and I have the full allocation for A-1 (so can roughly guess which application range I am at).
As for the USD:SGD forex rate, I foresee that USD would appreciate given the rise in US interest rates, ceteris paribus. When interest rates are stabilised at the Fed's targeted level, give or take another 1-2 years, the forex rate would fluctuate according to market conditions. Translate this over to the B bonds, they would at least gain in forex for the next 2 years or so, after which anything goes, in my opinion.